Real Estate Lawyers

How does federal bankruptcy law affect the 90-day deadline to file a deficiency action under Arizona real estate law after a trustee sale (non-judicial foreclosure)?  That was the question addressed in In re Rader.

Under Section 33-814 of Arizona real estate statutes, in order to pursue collection of a deficiency, a lender must file or maintain a lawsuit within 90 days after the trustee sale.  Otherwise, the debt is deemed satisfied/paid in full for the amount for which the property was sold at the trustee sale.  Of course, a lender may only file a claim for a deficiency if the claim is not barred by one of Arizona’s two anti-deficiency statutes.

But, what happens if the borrower is in bankruptcy?  The short answer is that bankruptcy law prevails and controls, not state law, if there is a conflict.  Specifically, once a bankruptcy is filed, the creditor must comply with bankruptcy law and, to the extent that conflicts with state law, the creditor is basically excused from abiding by state law.

In Rader, the borrowers filed bankruptcy, thus triggering the automatic stay.  The automatic stay prevents the creditor from taking action to enforce or collect the debt, except as allowed in the bankruptcy, unless the creditor obtains relief from the automatic stay.  Here, the creditor ultimately obtained relief from the stay to sell the property that was collateral for the loan at a trustee sale.  The property was eventually sold for less than the total amount due on the loan; thus, there was a deficiency.

The creditor had timely filed a proof of claim in the bankruptcy, but never filed an action to collect the deficiency as otherwise required by Arizona law.  The bankruptcy trustee objected to the claim since the lender never filed a deficiency action.  The Ninth Circuit Bankruptcy Appellate Panel addressed whether the creditor was excused from doing so based on bankruptcy law.

The Court found that it was legally impossible for the lender to comply with both bankruptcy law (and the automatic stay) and Arizona law (requiring the lender to pursue a deficiency action within 90 days).  Although the lender had obtained relief from the automatic stay, the order for relief was ambiguous, such that the lender was justified in not filing a deficiency action under state law after the sale of the real estate.  Federal bankruptcy law supersedes state law.  Therefore, the court found that the lender’s claim was not barred.

Please note that the Rader court’s analysis was based on the specific facts and circumstances of that case.  Most importantly, the court spent considerable time evaluating and interpreting the order lifting the automatic stay and allowing the lender to sell the property.  Ultimately, the court held that the order did not expressly authorize the lender to also file a deficiency action, such that it was prohibited from doing so under bankruptcy law.  As a result, its proof of claim in the bankruptcy was allowed.

Indeed, how a case turns out under Arizona real estate law almost always depends on the contract, other documents and specific facts of the situation.  Please consult one of our real estate attorneys if you have any questions.

The Arizona Supreme Court has resolved a recurring question: does the trustee have to “show the promissory note” in order to be able to foreclose by non-judicial trustee sale.  No, said the Supreme Court in its May 18, 2012 decision in Hogan v. Washington Mutual Bank.

The case involved two properties purchased by the borrower, John Hogan.  When Hogan received loans from Long Beach Mortgage Company (“Long Beach”), the properties were encumbered with deeds of trust.  Hogan defaulted on the loans, so the trustee under the deeds of trust recorded notices of trustee sales, in which it named Washington Mutual Bank and Deutsche Bank as the beneficiaries.

Hogan sued to stop the trustee sales, claiming that the Banks couldn’t foreclose unless they “showed the promissory notes,” unless they could prove that they were entitled to collect the amounts owed on the notes.  The Superior Court dismissed Hogan’s lawsuit, thus allowing the trustee sales to proceed. The Court of Appeals agreed.  The Arizona Supreme Court took up the issue because it involved a recurring question of statewide importance.  After reviewing and evaluating the deed of trust statutes and confirming that the deed of trust is separate from the promissory note, the Supreme Court found for the Banks.  There is no requirement for the trustee to “show the note” in order to foreclose by non-judicial trustee sale.

Deeds of trust and trustee sales are strictly governed by statute.  A.R.S. § 33-801 to 821.  According to the Supreme Court,

When parties execute a deed of trust and the debtor thereafter defaults, A.R.S. § 33-807 empowers the trustee to sell the real property securing the underlying note through a non-judicial sale. Hogan contends that before a trustee may exercise that power of sale, the beneficiary must show possession of, or otherwise document its  right to enforce, the underlying note. Nothing in our statutes, however, requires this showing. Section 33-809(C) requires only that, after recording notice of the trustee’s sale under § 33-808, the trustee must send the trustor notice of the default, signed by the beneficiary or his agent, setting forth the unpaid principal balance.

The Court agreed that the deed of trust and promissory note go together, such that only the lender entitled to enforce the note may foreclose.  But, there is nothing in the deed of trust statutes requiring the lender to show the note in order to foreclose.  And Hogan did not allege or prove that the Banks in this case did not have the right to enforce the notes.  He just claimed that they had to actually show the promissory notes and prove their right to enforce the loans before foreclosing.   The Court rejected that claim based on the absence of any such requirement in the statutes.

That is not to say that borrowers do not have rights if a lender forecloses without having a right to do so or a right to enforce the note.  Indeed, the Court noted that the trustee “owes the trustor (borrower) a fiduciary duty, and may be held liable for conducting a trustee’s sale when the trustor is not in default.”

Trustee sales are designed as an efficient and quick method of foreclosure.  Requiring proof of the right to enforce the note would frustrate those objectives, and impose a requirement not found in the deed of trust statutes.  Thus, the Court affirmed the dismissal of Hogan’s lawsuit to stop the trustee sales.

Read the entire Hogan v. Washington Mutual Bank decision.

Read ARS § 33-814.

Lenders and homeowner borrowers have been waiting for clarification of various questions arising under Arizona’s anti-deficiency laws.  Today, the Arizona Court of Appeals resolved three of the key issues involving Arizona’s anti-deficiency law applicable to judicial foreclosure actions, ARS § 33-729:  (1) whether the refinancing of a purchase money loan destroys the purchase money character of the loan and the borrower loses deficiency protection; (2) whether disbursements from a construction loan to construct a residence that otherwise qualifies for protection are considered purchase money; and (3) the treatment of a construction loan when part of the loan proceeds were disbursed for purposes other than the acquisition of the property or construction of a qualifying dwelling.  Helvetica Servicing, Inc. v. Pasquan (Ariz. Ct. App. 3/20/12).

Under Section 33-729, “if a mortgage is given to secure the payment of the balance of the purchase price, or to secure a loan to pay all or part of the purchase price, of a parcel of real property of two and one-half acres or less which is limited to and utilized for either a single one-family or single two-family dwelling,” the lender is limited to satisfying the amount owed by foreclosing on the property; the lender may not collect any deficiency (the difference between the debt and the value of the property upon foreclosure) from the borrower’s other assets.  In addressing the three issues presented in the case, the Court relied heavily on the public policies underlying the Arizona anti-deficiency laws – to protect certain borrowers and discourage the overvaluation of property in the lending process.

In the Pasquan case resolved by the Court of Appeals, the borrower purchased an existing residence in Paradise Valley for $935,000.  They paid $335,000 “down” and financed the rest, $600,000, with a loan from Hamilton Mortgage Company, secured by a deed of trust against the property.  Later, they obtained a new loan from Desert Hills Bank for $1.6 million, which was secured by a new first deed of trust against the property.  The Desert Hills loan was used to pay off the balance owed on the Hamilton loan and expenses to demolish the existing home and construct a new home in its place.  The borrowers then borrowed another $100,000 from Desert Hills, secured by the existing first deed of trust.  They later borrowed an additional $400,000 from Desert Hills, secured by a second deed of trust recorded against the property.  According to statement submitted by the borrower, “all of the Desert Hills loan proceeds were used for construction expenses.” Read more…

Arizona’s law does not require the recording of an assignment of a deed of trust before recording a notice of trustee’s sale where the beneficiary holds a promissory note that was endorsed and payable to bearer.

In Vasquez v. Saxon Mortgage, Inc., the borrower, Julia Vasquez, refinanced her home loan by signing a promissory note and deed of trust in favor of Saxon Mortgage, Inc. (“Saxon”).  Later, Saxon transfered the Note to Deutsche Bank National Trust Company as Trustee for Saxon Asset Securities Trust 2005-3 (“Deutsche Bank”).  Saxon simply endorsed the Note in blank, but the assignment of the Note was not recorded, and an assignment of the Deed of Trust was not recorded.  After Vasquez defaulted on the loan, Deutsche Bank appointed a new trustee under the Deed of Trust.  The new trustee then recorded a notice of trustee’s sale.  Thereafter, Saxon recorded an assignment of the Deed of Trust to Deutsche Bank.

The Arizona Supreme Court was called upon to answer the question of whether “’the recording of an assignment of deed of trust [is] required prior to the filing of a notice of trustee’s sale under A.R.S. § 33-808 when the assignee holds a promissory note payable to bearer.’”  The Court answered “no; Arizona law imposes no such requirement.” 

The Court noted that it was ”mindful of the human costs attendant to home foreclosures. Our task today, however, is simply to answer two purely legal questions . . .  Because the ‘deed of trust scheme is a creature of statutes,’ our role is entirely one of statutory construction.  Put differently, we are called upon not to determine whether there ought to be a law providing relief to Vasquez, but what current Arizona statutes provide.”  (Citation omitted.)  The Court held that “trustee’s sales are governed by A.R.S. § 33-808. That statute expressly requires that a notice of trustee’s sale be recorded. A.R.S. § 33-808(A)(1). The statute, however, does not require that an assignment of a deed of trust be recorded before recording the notice of trustee’s sale.”

The Court explained that the recording statutes are designed to protect subsequent transferees and creditors who do not have actual notice of the lien or transfer.  But, “consistent with this general purpose, Arizona law expressly provides that ‘[u]nrecorded instruments, as between the parties and their heirs . . . shall be valid and binding.’ A.R.S. § 33-412(B).  Thus, while the failure to record an assignment of a deed of trust might leave an assignee unprotected against claims by some purchasers or creditors, it does not affect a deed’s validity as to the obligor.”

The Court supported its decision with “Arizona law [that] expressly provides that the transfer of a contract secured by a deed of trust ‘shall operate as a transfer of the security for such contract.’ A.R.S. § 33-817. When the note signed by Vasquez was assigned to Deutsche Bank in 2005, the deed of trust was therefore also transferred by operation of law. Because § 33-817 does not require separate documentation of an assignment of the deed of trust when the secured note is transferred, it would make no sense to imply into § 33-808 a requirement that the assignment be recorded.”

Various sources have reported that JP Morgan Chase has temporarily halted foreclosures because of potentially flawed paperwork.  One issue that has arisen is reports that the people responsible for reviewing the loan documents failed to do so, such that they were actually unable to truthfully verify that the loans were in default and the amount of the default.  Chase’s stay on foreclosures follows GMAC’s halting of certain foreclosures and evictions in 23 states last week based on procedural problems in its paperwork. 

According to reports, the stoppages are just temporary and will not significantly affect the overall number of foreclosures.

The Federal government has two programs to help the unemployed avoid foreclosure. 

Through the Housing Finance Agency (HFA) Innovation Fund for the Hardest Hit Housing Markets (the Hardest Hit Fund), there $2 billion of  assistance that will be made available to those having difficulty making their loan payments due to unemployment.   This fund will be distributed to states that have been hardest hit by the downturn in the economy.  Alabama will receive over $60 million.  Arizona is not on the list published by the government.

The U.S. Department of Housing and Urban Development (HUD) is in the process of launching another program whereby $1 billion in assistance will be provided through the Emergency Homeowners Loan Program.  That loan program will provide interim assistance for not more than 24 months to people who are or may face foreclosure due to unemployment, underemployment or medical problems. 

Get more information about the foreclosure assistance programs.

The Arizona Court of Appeals recently decided a case where a deed of trust was mistakenly initially recorded without a legal description.   In 3502 Lending, LLC v. CTC Real Estate Service, the borrower executed a deed of trust with the legal description attached as an exhibit, but the deed of trust was initially recorded without the exhibit.   As between the parties to the deed of trust, the Court held that the deed was valid since it included the legal description when it was signed.

The Court next considered whether the deed of trust was superior to a later recorded deed of trust, even though the first deed of trust was recorded without the legal description.   The Court held that it was, notwithstanding the initial defect in the first deed of trust, since the party holding the second deed of trust had received actual notice that there was a prior/superior deed of trust against the property. 

This case reinforces the law that the recording system is for the benefit and protection of non-parties to the transaction and parties who do not have actual notice of a prior recording.